Nobody’s investing

ven worse for our long-run health, the UK is still failing to invest. A devastating calculation from The Economist showed that the UK was ranked 159th globally in 2012 when comparing investment as a share of GDP – truly appalling. We were beaten by Paraguay but just managed to do better than Trinidad and Tobago, Sierra Leone, Cote d’Ivoire and Greece. Not all capital expenditure is good: companies can spend money on projects that turn out to be duds, misled by artificially low interest rates. Governments can allocate cash to white elephants, such as HS2 that cost more in foregone resources than generate in extra GDP. But sensible investment projects are the only way to generate sustainable growth. A country’s GDP depends on how many hours are worked, and the productivity of the workforce – and that, in turn, is directly linked to human and physical capital.

There are several reasons for this dearth of investment. Large British firms are flush with cash but feel that they cannot make suitable, tax, inflation and risk adjusted returns from spending more on factories and computers. This is bad news for our future productivity performance.

ven worse for our long-run health, the UK is still failing to invest. A devastating calculation from The Economist showed that the UK was ranked 159th globally in 2012 when comparing investment as a share of GDP – truly appalling. We were beaten by Paraguay but just managed to do better than Trinidad and Tobago, Sierra Leone, Cote d’Ivoire and Greece. Not all capital expenditure is good: companies can spend money on projects that turn out to be duds, misled by artificially low interest rates. Governments can allocate cash to white elephants, such as HS2 that cost more in foregone resources than generate in extra GDP. But sensible investment projects are the only way to generate sustainable growth. A country’s GDP depends on how many hours are worked, and the productivity of the workforce – and that, in turn, is directly linked to human and physical capital.

There are several reasons for this dearth of investment. Large British firms are flush with cash but feel that they cannot make suitable, tax, inflation and risk adjusted returns from spending more on factories and computers. This is bad news for our future productivity performance.

ven worse for our long-run health, the UK is still failing to invest. A devastating calculation from The Economist showed that the UK was ranked 159th globally in 2012 when comparing investment as a share of GDP – truly appalling. We were beaten by Paraguay but just managed to do better than Trinidad and Tobago, Sierra Leone, Cote d’Ivoire and Greece. Not all capital expenditure is good: companies can spend money on projects that turn out to be duds, misled by artificially low interest rates. Governments can allocate cash to white elephants, such as HS2 that cost more in foregone resources than generate in extra GDP. But sensible investment projects are the only way to generate sustainable growth. A country’s GDP depends on how many hours are worked, and the productivity of the workforce – and that, in turn, is directly linked to human and physical capital.

There are several reasons for this dearth of investment. Large British firms are flush with cash but feel that they cannot make suitable, tax, inflation and risk adjusted returns from spending more on factories and computers. This is bad news for our future productivity performance.

In previous posts (https://thenextrecession.wordpress.com/2013/02/10/why-is-there-a-long-depression/) I have pointed out the supposed conundrum between profits and investment present in many countries – namely profits are up, but investment is not matching the rise in profits. According to GMO, the financial asset manager, profits and overall net investment in the US tracked each other closely until the late 1980s, with both about 9% of GDP. But after the recession, from 2009, it went haywire. US pretax corporate profits are now at record highs – more than 12% of GDP – while net investment (that’s investment after replacing worn out old capital) is barely 4%.

US corporate profits recovered dramatically from the trough at the end of 2008. They surpassed their previous peak in 2006 by early 2010. But most of the recovery in profits since the end of 2008 has been hoarded and not spent on new investment. Undistributed profits have accumulated to $744bn from just $19bn at the end of 2008! Profits are up around $1trn since then, so only 30% of the increase in profits has been spent on new investment. This explains why the economic recovery has been so weak, with the US economy growing only barely at 2% a year. It is exactly the same story in the UK. According to Treasury Strategies, a body that looks at these things, corporate cash in the US was 10% of GDP in 2000 and is now 15%, while in the Eurozone the corporate cash pile has risen from 15% to 21% and in the UK from 26% in 2000 to 50% of GDP in 2012 (http://treasurystrategies.com/news)!

Companies are stockpiling cash rather that investing. Take the latest data from the UK. The amount of cash held on the balance sheets of the UK’s largest companies by market value has reached an all-time high to stand at £166bn, according to Capita Asset Services. Gross cash balances for FTSE 100 companies have risen by one-third from £123.8bn since 2008. Yet British capitalist companies are still failing to invest that cash. The Economist showed that the UK was ranked 159th globally in 2012 when comparing investment as a share of GDP, behind by Paraguay.

But, as Marxist economist Mick Brooks explains (in an email to me – see https://thenextrecession.wordpress.com/2012/08/20/capitalist-crisis-theory-and-practice/), cash reserves are a sum, a stock, accumulated over years. They are not an indication of current profitability. The rate of profit is a flow measured over time. So we need to look at the net asset position of companies – not just their pile of cash and other assets but also their underlying debts and balance the two off against each other. Companies can pay for investment in two ways; by directly investing their own profits or by borrowing and going into debt. In recent years, there has been a tendency for corporations to become more reliant on debt finance. The reason why the ‘credit crunch’ (when bank lending suddenly stopped) had such wide and rapid repercussions on the ‘real economy’ was because firms were head over heels in debt.

US companies are reputed to have a cash mountain of $2trn with another $2trn offshore, according to Edward Luce (Stuck in the mud, Financial Times 13.05.13). This is for both financial and nonfinancial corporations. But, to put this in perspective, America’s GDP is around $15trn. And the corporate debt for nonfinancial corporations alone in the US is 72% of GDP. So cash assets are small compared to corporate debt. Perhaps what is more relevant to our enquiry is not the total indebtedness of a country, or of its nonfinancial firms, but how the total debts of nonfinancial firms stack up against their assets.

However, most mainstream explanations of the conundrum do not draw upon the relationship between profitability, debt and investment. Paul Krugman suggests that investment is lagging profits because a general increase in monopoly power. “The most significant answer, I’d suggest, is the growing importance of monopoly rents: profits that don’t represent returns on investment but instead reflect the value of market dominance,” he wrote. But while more monopolies might explain higher profits with less investment,there is little evidence that monopoly power has risen in the last few years. After all, capital expenditures are low in competitive industries as well.

Austrian school economist Benjamin Higgins reckons that businesses won’t invest because they may be more or less “uncertain about the regime,” by which he means, they are worried that investors’ private property rights in their capital and the income it yields will be attenuated further by government action: regulation, taxation and other controls. In a way, this explanation is similar to that of Michal Kalecki, at the other end of the spectrum of political economy. Kalecki reckoned that full employment and economic recovery under capitalism could not be achieved because capitalists feared government stimulus policies to boost demand through spending and investment would encroach on capitalist power (see his famous essay, The political aspects of full employment (http://courses.umass.edu/econ797a-rpollin/Kalecki–Political%20Aspects%20of%20Full%20Employment.pdf). Capitalists would (irrationally) prefer no recovery to one led by government.

But there is no need for the ‘fear of government’ argument, rational or irrational. It’s not fear of government that stops investment picking up, but the objective reality of low profitability. Cash flow and profits may be up for larger companies, but the rate of profit has not recovered in many capitalist economies, like the UK and Europe.

This argument is backed up by several studies. JP Morgan economists recently made a study of global corporate profitability. They concluded that what they call “profit margins” have fallen in Europe and in emerging economies over the past two years. They also concluded that US profitability has stagnated over the last six quarters, on their measure. JP Morgan’s measure of profitability is not a Marxist one and it is not even a measure of corporate profits against corporate capital. But even so, it does produce a global measure of corporate profitability that shows a fall from near 9% before the Great Recession down to under 4% in the trough of 2009 before recovering to 8% in 2011. But in 2012, it declined again to 7%, 13% below its peak in February 2008 when the Great Recession began. This decline in global profitability was mainly driven by Europe and by a fall in emerging economies. Similarly, my own analysis of profitability as measured by the EU AMECO net rate of return on capital and US data, indexed from 2005 shows the same thing (see my post, https://thenextrecession.wordpress.com/2013/02/25/deleveraging-and-profitability-again/).

The EU Commission has also commented on corporate profitability and investment in Europe. In its Winter Economic Forecast report (2012), it noted that non-residential investment (that excludes households buying houses) as a share of GDP “stands at its lowest level since the mid-1990s”. And the main reason: “a reduced level of profitability”. The report makes the key point that “measures of corporate profits tend to be closely correlated with investment growth” and only companies that don’t need to borrow and are cash-rich can invest – and even they are reluctant. The Commission found that Europe’s profitability “has stayed below pre-crisis levels”.

The EU report also found a “strong negative correlation between changes in investment since the onset of the crisis and pre-crisis debt accumulation, suggesting that the build-up of deleveraging pressures has been an important factor behind investment weakness”. The Commission reckoned that Eurozone corporations must deleverage further by an amount equivalent to 12% of GDP and that such an adjustment spread over five years would reduce corporate investment by a cumulative 1.6% of GDP. Given that gross non-residential investment to GDP is at a low of 12% right now, that’s a sizeable hit to investment growth.

According the Bank for International Settlements (BIS), in its latest annual report of June 2013, the level of debt in the world economy has not fallen much despite the Great Recession. Indeed, the average non-financial debt to GDP ratio for the major developed markets is currently 312% (June 2013) compared to 280% in March 2007. While the household debt ratio has declined from 97% of GDP to 88% now, non-financial corporate debt has risen from 101% to 105% now and government debt has rocketed from 83% to 120%.

The BIS also found that of 33 advanced and emerging economies, 27 have non-financial debt to GDP levels above 130%. Two of those have ratios above 400%, four between 300-400%. Only six have ratios below 130% and only three below 100% of GDP – namely Turkey, Mexico and Indonesia. Of the 33 economies, 18 have rising debt ratios, 11 are flat and only four have falling debt ratios. Of those four, three are in IMF or Troika bailout programmes (Greece, Ireland and Hungary). Only Norway has reduced its overall non-financial debt ratio ‘voluntarily’. Only Mexico and Thailand have reduced their overall debt levels in the last 15 years. Household debt ratios have fallen in some developed markets, including the UK and the US, as well as some peripheral EMU countries. But 27 economies have experienced a rise in private debt-to-GDP ratios since the global financial crisis.

Large multinationals have preferred to invest in emerging economies rather than in the domestic economy. And cash-rich companies have taken advantage of credit-fuelled (QE) stock markets to buy back their own shares rather than invest and boost dividends. In contrast, small businesses cannot invest because they cannot borrow on current terms and many are zombie companies just able to pay the interest on their debt. They have been hoarding labour rather than invest in new equipment and labour saving systems. Overall corporate debt levels just remain too high to allow new investment – paying down debt or holding cash is safer.

The conundrum of rising profits and stagnant investment in productive assets shows that the “recovery” is weak and partly ‘artificial’. It depends much on central bank liquidity injections, which find their way into the financial sector, not the real economy. Until there is a sufficient rise in profitability in the productive sectors and fall in net debt for corporations, private sector investment will continue to fall behind profits and cash piles will rise further and companies hoard rather than invest.

39 Responses to “Nobody’s investing”

Does investment here include the purchase of additional variable capital? I suspect not because bourgeois accounting practice is to count it as payment of wages and salaries. But, if the economy has shifted to a service based economy on the size it has, wouldn’t the biggest element of investment for capital today be precisely the purchase of additional variable rather than fixed, or even circulating constant capital?

It is also likely to be the case that a process of release of capital like that described by Marx in the Chapter on the Rate of Turnover in Volume II has occurred, whereby the increase in the rate of turnover has released previously tied up capital. The fall in the value of fixed capital is also likely to have contributed to that.

However, in the case of Britain and other western economies, since 2008, I think the most likely answer is that investment has been curtailed out of uncertainty, not of the Austrian or Kaleckian variety, but simply uncertainty fuelled by the aftermath of the financial crisis, the unlikelihood that demand is likely to rise much in a climate of austerity, and wages rising less than inflation etc.

Its quite possible for profits to be high under such conditions without businesses feeling they have to lay out huge amounts of additional capital to expand production. I believe however, they will have to lay out more capital in coming years to simply maintain their current levels of productivity, without which they will lose competitiveness. On that basis the rate of profit WILL fall.

If your assertion is that corporate debt is “stunting” profitability, and investment, then you need to explain something that becomes apparent with the FRED graph you reproduce:

Namely, corporate debt as a percentage of net workis on a pretty continuous increase from 1983 through the 1990s. exactly the period you regard as marking a recovery in the rate of profit, and a part of which (1993-2000) sees real investment in fixed assets increasing at a high rate.

Michael,
I tend to agree with most of your arguments regarding profitability. One question I have not seen answered on your blog: how do we get profitability up so that these corporations and capitalists with cash will start investing again?

Given that interest rates have been falling for the last 30 years, its not surprising that net debt rises. Its an indication of increased gearing, as firms borrow at cheap rates rather than issue shares. In fact, over the last period, firms have been using cheap money on a phenomenal scale to buy back existing shares.

A couple of years ago, Microsoft who at the time had around $40 billion of cash on their balance sheet, still issued a bond for another several billion, simply because they could do so at historically low rates.

On what facts do you base this claim? According to Marx, when the size of capital gets beyond a certain point, it is the volume not the rate of profit that is decisive in determining accumulation. The fact there has been large scale accumulation in the past does not preclude at all such accumulation continuing. In fact, it may be the basis of such further accumulation, as it reduces the value of capital.

For example, Marx gives the example of the cotton spinner, whose new machine causes a glut in the market.

“(When spinning-machines were invented, there was over-production of yarn in relation to weaving. This disproportion disappeared when mechanical looms were introduced into weaving.)”

Here the reduction in the value of yarn resulting from the introduction of machines also acts as a spur to investment in weaving.

What is determinant here is whether the product of all that accumulation can be sold profitably or not. If the large corporate businesses that dominate the modern economy believe not they will not invest additional sums, and vice versa.

Well, it might be helpful to look into the actual operation of capital during and after periods of high investment, like say. oh right now– like in say, oh, some really important industries in capitalist reproduction, like uh say…….shipping– you know like the container fleets, the bulk carriers etc. and like oh…….well the auto industry in Europe and comparing that to the oh….the auto industry in the US… and oh like flat panel displays, or oh…..like the steel industry, or the aluminum industry.

That’s what I’m basing it on. Or you might want to consider how US capital structured its recovery from the 2001-2003 recession, and even more to the point what preceded that recession.

I think the evidence from the actual accumulation of capital shows that as Marx put it, if I recall correctly, capital becomes the barrier to capitalist accumulation. Something like that.

I never said large scale accumulation in the past PRECLUDES ALL such accumulation continuing, or resuming in the future.

I said the recent accumulation, and I’d trace it back to the 1993-1999 recovery, created this overproduction of the means of production as capital, as value producing, and inhibits further accumulation now.

Sure accumulation MIGHT engender further accumulation– just as it did in the 1993-2000 period, and just as surely it will lead to declining profits, economic contraction, and reduced investment.

I THINK that until capital figures out some way to a) devalue sufficient masses of capital b) aggrandize further sources of labor power at a cost below that currently required for the reproduction of that labor power, the great recession and its shallow recovery will continue to “dog” the globe. And capitalism’s “solution” to this problem is never pretty.

Your “determinant” of accumulation:

“What is determinant here is whether the product of all that accumulation can be sold profitably or not. If the large corporate businesses that dominate the modern economy believe not they will not invest additional sums, and vice versa.”

makes– as you put it– “belief” the determinant of capital accumulation; “if the large corporate businesses……..believe…”
which sounds to me like the old “confidence” issue– the old “the only thing capital has to fear is fear itself” shibboleth– which is of course the salesman’s catechism.

Belief is determined, not determining, by the actual returns on investment.

But this requires an investigation into the concrete configuration of capitalism– not a recitation of quotes. .

“makes– as you put it– “belief” the determinant of capital accumulation; “if the large corporate businesses……..believe…”
which sounds to me like the old “confidence” issue– the old “the only thing capital has to fear is fear itself” shibboleth– which is of course the salesman’s catechism.”

Not at all. When Marx made that point about capital being the barrier what he was talking about was the fact that supply is a function of Value, whereas demand is a function of Use Value. Capital always seeks to increase the quantity of use values it produces, and in doing so reduces the individual value of each unit of production. But, consumers demand is not determined by Value, but Use value. I do not buy something to consume because its cheap, but because it provides me with Use Value.

Just because the price of something has halved does not mean I decide to buy twice as much, or as Marx puts it.

“It is quite incomprehensible, therefore, why industry A, because the value of its output has increased by 1 per cent while the mass of its products has grown by 20 per cent, must find a market in B where the value has likewise increased by 1 per cent, but the quantity of its output only by 5 per cent. Here, the author has failed to take into consideration the difference between use-value and exchange-value…

The same value can be embodied in very different quantities [of commodities]. But the use-value—consumption—depends not on value, but on the quantity. It is quite unintelligible why I should buy six knives because I can get them for the same price that I previously paid for one.”

In other words, demand, the market does not expand on the same basis or in the same proportion as supply/production.

But, as Andrew Kliman states in his book, in the quote I referred to previously, modern corporations do not have to rely on beleif about the state of the market. They spend huge sums collecting big data on consumer behaviour each time we shop, and from no end of surveys etc. It is not some mysterious belief they base their investment decisions upon, but masses of data!

Marx was not at all averse to taking “confidence” into consideration in his analysis. In his analysis of interest rates, for example, he says that interest rates after a recession or crisis tend to be low, because the demand for money-capital is low, because capital lacks the confidence to invest. Its only as things begin to improve, he says, that they become more confident and start to invest and demand more money-capital to do so.

Sounds, uh, reasonable argument to me, and er sort of tallies with what we see today.

First, Hire rates for dry bulk carriers are extremely volatile over the short term. What the article doesn’t mention of course is that the current $33,000 hire rate for capesize bulk carriers while it may be a 33 month high, is not a 36 month high which was averaged at $60,000/day for the major routes of these ships, so this marvelous, astounding miraculous recovery is a little less marvelous astounding and a recovery.

Secondly, if you look at the Baltic Dry Index, which calculates an index based on daily hire rates for bulk carriers– handysize, panamax, and capesize– you see the BDI spiked in 2008 to about the 12000 level before declining to today’s app 1000- 1500 level– which is pretty much in line with the long term BDI average.

Thirdly, dry bulk carriers are not the fastest growing portion of the world merchant fleet; container ships are, and container shipping is choked with overcapacity, so much so that slow-steaming and other efficiency measures, reducing the supply of container shipping by increasing the turnaround time of the ships, has been the only thing keeping rates “above water” you should pardon the pun. And that distress in container shipping is the direct product of astounding levels of investment in 2005, 06, 07, 08…with ships from that period still being delivered to carriers.

Which all seems to bear out Marx’s point that these things tend to go in cycles, as he points out in Chapter 6 of Volume III, and as he refers to in the quote above about the introduction of spinning then weaving machines.

Massive increases in demand and capital accumulation in China and elsewhere drove up raw material and shipping prices at the start of the new long wave boom after 1999. Eventually the high profits made by shippers and raw material producers encouraged large scale investment in new production. That has eventually come on line, just as the feed through of those high prices has fed through into final product prices and started to choke off demand.

Excess production of raw material and shipping ensues, causing prices to drop. Demand for raw materials and shipping then rises again. In other words a business cycle.

There is nothing here that means that previous investment must mean that current investment is choked off, certainly nothing that leads to that due to a long run tendency for the rate of profit to fall.

You introduce a fragmentary bit of evidence about the capesize hire costs, and when it is pointed out how the actual index of such costs for the industry as a whole refutes the implied claim that the hire costs indicate a “recovery” in the industry, you duck the issue and claim “oh it’s cyclical.” I’ve never said capital isn’t cyclical. The issue are 1)is what drives the cycle? and 2) is there, circumscribing the shorter term cycles, an overall secular change that makes the downside of the cycle more acute?

You asked how I could assert that the reason for the current low level of investment is the previous investment, the previously accumulated capital.

I provide specific industries where the investigation of the data makes it clear that the prior investment, accumulation, has created an “oversupply of capital” an overproduction of capital and a subsequent decline in profitability– and further, where f steps taken to “recovery” provide further evidence that that overaccumulation, that overproduction of capital, was the source of the distress.

In response, you provide a single reference to a momentary increase in dry bulk carrier hire costs, which are notoriously volatile and indicative, in their isolation, of exactly nothing.

Then you try to counterpose cyclicality to over-investment, or over-accumulation, or the tendency of the rate of profit to decline– as IF Marx did not link cyclicality to such a tendency of the rate of profit to decline. He most definitely did.

Rather that deal with any of the concrete configurations or conditions of capitalist accumulation as manifested in and throughout its various sectors– aluminum, flat panel, displays, shipping, autos, you simply restate your position

“There is nothing here that means that previous investment must mean that current investment is choked off, certainly nothing that leads to that due to a long run tendency for the rate of profit to fall.”

Well, that just isn’t the pattern, the cycle, that capital has manifested since 1973, since 1993, since 2001, since 2005, and since 2008.

Twain is reputed to have said “There are lies, damn lies, and then there are statistics.” I think he was wrong. There are lies, damn lies, and quotes. Not meaning the quotes are lies, but we can chose any quotes we want to make an argument.

What you need to do is account concretely for the actual movement of capital; its expansion, the sources of that expansion; and the contractions, the depth of that contraction; and the source of that contraction. Now if profitability isn’t the key to all that, and if the relation between Big C capital, in particular the value of fixed assets, to labor power isn’t at the heart of profitability, and if the changes that have dictated where and how that profitability has trended aren’t at core changes between necessary and surplus labor, then we can and should stop quoting Marx, because we’ve pretty well discounted his critique of capital as a system of social reproduction.

“You introduce a fragmentary bit of evidence about the capesize hire costs, and when it is pointed out how the actual index of such costs for the industry as a whole refutes the implied claim that the hire costs indicate a “recovery” in the industry, you duck the issue and claim “oh it’s cyclical.”

My point wasn’t specifically about the shipping rates, though whatever you try to say, for that particular piece of investment, it does run counter to your argument. The point was more generally that the reason for the higher shipping rates was a surge in demand from China, that was restocking iron ore. Part of the reason for the restocking i.e. investment was lower costs.

So, China which has been the case par excellence of large scale investment over the last 30 years, confounds your argument that previous investment prevents current investment. In fact, a look at China’s actual growth itself serves the point.

China is still growing, i.e. accumulating additional social capital, at a rate of around 7.5%. That is less than the 10-12% rate it was growing at 10 years ago, as I’m sure you would point out, as you seem to be fixated by the fact that current increases in investment might not be as high as some increases in investment that you can pluck out from the past, to try to prove your point.

However, the fact is that China’s economy is double the size it was 10 years ago, so today’s 7.5 growth means that in terms of the actual quantity of investment being undertaken, it is the equivalent of a growth rate of 15% 10 years ago!

this report from the FT about rising profits and rising shipping rates for container ships run by Maersk that is responsible for around 15% of global seabourne freight also seems to challenge your argument.

They made a net profit of $498m in the third quarter, up from a gain of $227m in the previous quarter and a loss of $289m a year earlier. It increased its global rates by 6 per cent year-on-year in the quarter while volumes were flat.

meanwhile according to Lloyds the level of idle fleet has fallen to around 5% .

According to the 2012 container census, the container fleet increased by 8% in 2011, as opposed to an increase of only 7% in 2010. The main reason it gives for the slowdown in the second half of 2011, is not any falling rate of profit, but a miscalculation of the growth of demand.

A report from the FT about rising profits and rising shipping rates for container ships run by Maersk that is responsible for around 15% of global seabourne freight also seems to challenge your argument.

They made a net profit of $498m in the third quarter, up from a gain of $227m in the previous quarter and a loss of $289m a year earlier. It increased its global rates by 6 per cent year-on-year in the quarter while volumes were flat.

According to the 2012 container census, the container fleet increased by 8% in 2011, as opposed to an increase of only 7% in 2010. The main reason it gives for the slowdown in the second half of 2011, is not any falling rate of profit, but a miscalculation of the growth of demand.

QE indirectly raises profits by lowering taxes. The government spending that it pays for is generally unproductive of surplus value, but “unproductive” does not mean unnecessary. Schools, roads, air ports, hydro schemes, are vital for the functioning of the state and circuit of capital accumulation. As these are paid for by printing money, so they do not have to be paid for by taxes. The real wage is higher – so the cost of reproduction of labour power falls – and profits are higher – as they are not taxed.
It would be expected under normal circumstances that if the state simply printed money as the value of money in circulation is simply a measure of the value of exchanges within the market boundary, that inflation would result. Foreign governments would dump their US government bonds, the dollar would slump, and hyper inflation result. None of this has happened this time. Rather foreign governments have seen the value of their dollar holdings fall by the proportionate increase in US state assets.
The problem these foreign governments face is where to put their surplus funds? Not in Europe – given the dodgy state of the Euro – not in the Pound – also printing money – yes in their domestic economies but there are limits to how much investment they can absorb – so they have to grin and bear it.
Mean time the US capitalists pile up state assets at their expense.
P.S. It reduces interest rates by lowering the demand for capital, as the government no longer has to borrow from the capital markets.

If Bill J is correct, we should see a significant accumulation of government fixed assets.

I don’t think the evidence supports Bill’s argument. QE1 started in November 2008. According to the US BEA actual investment in government fixed assets grew by about 2% in 2009; was flat in 2010; in 2011 it actually declined to an amount below that of 2008.

In addition I don’t find the evidence that foreign holdings of US denominated assets have been devalued by QE actions. Indeed,
QE has bolstered the market values of such holdings, particularly the agency debt of FNMA and FMAC that were significant portions of China’s holdings.

why should we see a significant accumulation of fixed assets, given that government bonds are stockpiled by the FED? To the tune of $3-4 trillion so far – and rising.
The book value is one thing – try selling these assets when the FED is flooding the market with free money.

“The government spending that it pays for is generally unproductive of surplus value, but “unproductive” does not mean unnecessary. Schools, roads, air ports, hydro schemes, are vital for the functioning of the state and circuit of capital accumulation. As these are paid for by printing money, so they do not have to be paid for by taxes.”

Because YOU SAID: “Mean time the US capitalists pile up state assets at their expense.”

So where is the expansion in funding schools, roads, airports, hydro schemes?

So where are capitalist piling up state assets at the expense of foreign holders of US debt instruments?

And because YOU SAID: “Rather foreign governments have seen the value of their dollar holdings fall by the proportionate increase in US state assets.”

So where have the value of their dollar holdings declined– since QE1,2,3 have contributed to the decline of interest rates and the INCREASE in the market value of US Treasury and Agency debt instruments?

Central banks– which are really minor players when it comes to hard currency cash reserves, and cash-type assets such as US treasury instruments– with 90% of the $60 trillion in such assets under the control of hedge funds and asset managers in the US and Western Europe– have seen the market value of their holdings appreciate with the decline in interest rates with the QEs, and in fact it has been the concern about the end of the QE program that has caused interest rates to rise, and currency flows to reverse and brought new distress to emerging markets and the holders of US debt instruments in that the market value has declined to equalize the yield-to-maturity.

And yes, central banks do actively manage their holdings of cash and cash type assets, searching for yield and security like any other holder of such assets.

OK so if I say dogs, rabbits and cats are examples of MAMMALS, that doesn’t mean that whales, mice and humans aren’t also examples of mammals.
Examples of unproductive government expenditure, do not exhaust the list of such expenditures.
The market value of government debt – its sale price – is the multiple of its interest rate by the duration of the of the financial instrument, ergo if interest rates have fallen, so has the price of the financial instrument.
$60 trillion of such assets – where does that number come from? It sounds like the total of derivatives to me. US government debt is around $10 trillion, $3 trillion of which is owed to themselves via QE.

$60 trillion is not the amount of US govt. debt. It is the amount of all “hard currency” cash, cash-type assets (including government debt instruments, money market shares, etc. ) held globally. It puts a bit of perspective on the level of US debt held outside the US. That was the only point.

As far as your description of unproductive assets— if the examples you provide don’t indicate an expansion of such assets, perhaps you can provide examples that do.

It’s great to say X, Y, Z are only representative examples of some relation, but we’re talking about a change in that relations, not its existence as a category, like the category mammals.

The BEA numbers are not limited to roads, schools, buildings, ports, or river levees, although they certainly include that. So if there is evidence that QE is financing the US govt’s accumulation of fixed, “unproductive but necessary” assets– which should see that somewhere, no?

And if private corporations are taking over state-financed assets as a result of QE we should see that too, somewhere, right?

If QE has devalued other governments’ holdings of US treasury and govt. agency debt, then we should see that somewhere, right? Since these governments participate in the markets for such instruments, and manage their holdings, we should observe the devaluation in the market values of the instruments, and in the yield-to-maturity equivalences.

But we don’t see that. In fact we’ve seen exactly the opposite. QE has effectively supported the value of such instruments, triggering an appreciation of their exchangeable value in the markets.

Despite the original and scattered grumbling that QE was giving the US an “unfair advantage” in providing excess liquidity; keeping interest rates low; driving down the dollar, driving up the real, the rupiah etc. the real (no pun intended) pain and screaming started after the Fed announced it was considering its exit strategy, its “tapering.”

Sure, the market value of the securities would decline if a block of $3 trillion in US agency debt was dumped on the market. Hell, the price of gold would plummet if an additional 1 million tons were dumped on the market. But that’s kind of why the Fed proposed a tapering………know what I mean?

So your $60 trillion is basically spurious then.
Unproductive expenditure includes assets, and a lot of non-assets, expenditure on library workers for example. What’s to explain? In fact the Obama administration has been busy sacking public sector workers, unlike all other recent presidents.
As for the devaluation – given that QE reduces interest rates by reducing the demand for load capital – and the value of financial assets is a multiple of interest rates – then my argument obviously holds, whatever the temporary fluctuations in market prices.
As I explained all of the foreign holders of US debt – principally China and Japan – have to swallow the medicine, given their subordinate place in the world market.

What’s to explain are your assertions that lack any empirical confirmation.

The US has not funded its acquisition or creation of state assets with QE purchases by the Fed. There’s no TVA program out there. No massive Interstate Highway Project. High Speed Rail funding is minimal. So where is the acquisition of assets which you claimed takes place.

You go on to claim: “Unproductive expenditure includes assets, and a lot of non-assets, expenditure on library workers for example. What’s to explain? In fact the Obama administration has been busy sacking public sector workers, unlike all other recent presidents.”

Nonsense. In fact the Obama administration has not been busy sacking public service workers unlike all other recent presidents. First off, US govt employment was on a steady downward trend from 1950-1980. Secondly, US federal govt employment began an upward tick in 2008, spiked in 2010 with the census, dropped sharply after the census and is now currently at or near the same levels it was in the period 2002- mid 2009.

The vast increase, and then subsequent vast layoffs in govt. workers has been in state and local governments, not the federal government.

Re foreign holders of US debt– no you haven’t explained how “they have to swallow their medicine”– you’ve asserted that; you’ve repeated the assertion, but you have not explained it in the face of evidence that counters that assertion.

My $60 trillion in assets is not spurious. Such assets exist and are “in play.” I put it in simply to show how outclassed central banks are in trying to control markets, currency markets in particular.

The private holders of assets make the markets. They are the ones who responded to the suggestion of “tapering” of QE which lead to increased interest rates devaluing market price for securities.not the QE program itself.

You can keep on making things up. Repeating your imaginations does not make them explanations.

What’s your fetish with assets? Big deal they’ve wasted their money in your opinion.
And excuse me its not central government employment its local government employment that’s falling. I stand corrected.
But it doesn’t alter the fact that the bulk of the deficit has been paid for by QE. That’s just true assertions don’t come into it.

I have no fetish with assets. You said what you said. I’m asking you to provide some data to back up your assertions. You made the assertions, not me.

You have also asserted:

“As for the devaluation – given that QE reduces interest rates by reducing the demand for load capital – and the value of financial assets is a multiple of interest rates – then my argument obviously holds, whatever the temporary fluctuations in market prices.”

Which is also nonsense. QE doesn’t reduce interest rates by reducing the demand for loan capital. That’s just absurd. The demand for loan capital was reduced by the economic contraction. And after reaching a trough in 2009, the “turnaround” such that it has been, has seen an annual record issuance in the bond markets, in 2010 IIRC, and near records in either 2011 or 2012– raising capital for corporations and increasing cash type assets on hand. Last time I checked, corporate bond markets qualify as sources of loan capital.

QE was designed for several reasons, not the least of which was to purchase the debt instruments of FNMA and FMAC which agencies were in fact issuing and securing 90-95% of the mortgages after the 2008 meltdown,and which themselves were bankrupt.

That the banks were so reluctant to increase their lending was due to the levels of non-performing debt on their balance sheets. A lot of that has been written off, absorbed, much more so in the US than with EU banks which are estimated to still have over euro 1 trillion in NPA on their books– and incidentally where banks are much more important to corporate finance than in the US.

I suppose this bit of your nonsense is derived from the original bit:

“QE indirectly raises profits by lowering taxes. The government spending that it pays for is generally unproductive of surplus value, but “unproductive” does not mean unnecessary. Schools, roads, air ports, hydro schemes, are vital for the functioning of the state and circuit of capital accumulation. As these are paid for by printing money, so they do not have to be paid for by taxes.”

What government spending did QE pay for that provided schools, roads, airport– those vital functions for the state and the circuit of capital accumulation?

What assets did the US bourgeoisie get a break on while foreign governments had to “take their lumps” and have their holdings depreciate since 2008?

No one has argued about what has or has not absorbed the deficit. That’s not the issue here. Purchase of US Tsy instruments has funded the deficit. The issue is the claims you made about QE does in what you call the “vital circuits of capital accumulation.”

No one has argued that the purchase of bonds through QE has funded the deficit – except you. You concede the point, while simultaneously describing it as nonsense.
If QE funds the deficit then it lowers taxes that would otherwise be collected to pay for it. The funds that QE provides are spent on government expenditure. That may or may not include assets.
QE reduces the demand for loan capital – as the government no longer requires to borrow loans – as it replaces loans with printed money.
The value of existing loans – a multiple of the interest rate – is reduced as interest rates fall due to the reduction in borrowing that would have otherwise occurred.
Honestly how complicated is it?
Etc. ad infinitum.

Honestly, it’s so uncomplicated that there must be empirical confirmation for all your assertions. And yet you provide none; and none can be found in the actual functioning of the economy.

And… you might want to check your understanding of the loan and bond markets because as interest rates fall the market value, the exchangeable value of the credit instruments– the US Treasury instruments will appreciate, as it has for 5 years, not decline as you proclaim.

If you really believe that the interest rate declines cause the market value of the bonds to fall, I know some bond traders who would love to become counter-parties to your market positions.

Well good for you.
You may want to remember that there has recently been a crisis called “the credit crunch”. As a result investors have sought out US government bonds as a “safe haven”. In these circumstances “fundamentals” don’t apply.
As for “empirical evidence”, this is what is know as logical deduction.
If the US government had not printed money under QE they would have either had to a) raise taxes or b) borrow money. As they printed the money, the didn’t have to raise taxes or borrow the money, consequently, taxes and borrowing were lower.
There’s obviously no “empirical evidence” of that, for, as a result of QE – that is – printing money – it didn’t happen.
Things that don’t happen, don’t have “empirical evidence” for them.

The crisis was not a credit crunch. No less than the former guv of the Bank of England, Mervyn King, let the dead cat out of the body bag, 4-5 years ago when he stated that the crisis was not one of liguidity, but one of solvency. Big difference.

Fundamentals don’t apply under conditions of what yourself call a crisis? That’s very interesting. I thought the thing about fundamentals was that they always apply; that in fact the crisis is a result of the fundamentals of capitalist accumulation and that the actions of governments, central banks etc. are attempts to mitigate just those fundamentals.

If fundamentals don’t apply, then on what basis can you make your “logical deductions” that somehow determine what must occur even though “fundamentals don’t apply”?

So you present us with conditions where “fundamentals don’t apply,” but nevertheless you argue fundamentals of debt expansion and monetary depreciation must apply based on “logical deduction”??

Well Mervyn King was never much of a central banker. Maybe his inability to see a credit crunch, when its dragging down the entire world economy is a symptom of that.
The crisis was one of liquidity and then one of solvency. As credit dried up, so profits slumped and businesses went bust. That’s a fact. But evidently some facts are “irrelevent”.
There’s fundamentals and fundamentals. The interest rate is only loosely related to the rate of profit. The fundamental basis for the value of any financial instrument is the rate of return multiplied by its longevity, but in a period of crisis – a credit crunch indeed – then other factors come into play. That’s a fact too.

That’s not a “fact.” The fact was the crisis began with growing insolvency, not with a lack of liquidity. Bear Stearns closed two hedge funds, which more or less kicks it off in 2007 because they were insolvent. They were insolvent because these were ABS backed funds, and the assets underlying the ABS were insolvent. In the case of home mortgages, the growing number of mortgages 60 days and then 90 days in arrears is what led to this “kick-off,” to Bear Stearns itself going under and to the whole ABS meltdown.

Profitability in the US economy had as a whole declined prior to the 2007 Bear Stearns incidents.

The mortgage issuers, and backers, and MBS issuers had not so much ignored the rising rate of defaults in 2006 in the sub-prime and non-conforming mortgage business, as they had actually “doubled down” on those vehicles… pushing even more money into the sub-prime and non-conforming sectors.

They were confident that with real interests still low and the Fed, while taking small steps to raise the Fed funds rate was practicing restraint and flatly refusing to restrict, or oversee, intervene, restrain etc. the money the members of the Federal Reserve System pumped into those sections of the mortgage and investment markets, a few more drops of blood could be wrung from these dead cats, with each MBS issuer looking on his or her or their counterparties as the “bigger fool.”

And that’s the governing principle of selling ABS– find the bigger fool.

The incredible number of subprime mortgages issued in 2006-2007 broke the “bubble” when they started to go bad after less than 1 year after issuance.

That’s a solvency crisis, not a credit crunch.

You might as well claim that the GM bankruptcy, or that of the Overseas Shipping Group, was a result of a credit crunch After all, if GM could have received funds to rollover its debt, it wouldn’t have declared bankruptcy, would it? Of course not. So why couldn’t GM acquire the credit? Why couldn’t the OSG refinance its debt? Because earnings of the industry did not warrant the extension of the credit when the earnings of the credit issuers were themselves so severely impaired as to bring them too practical insolvency.

Mervyn King not much of a central banker? OK by me. Tell us who is your idea of a good central banker? In the meantime King was responding to inquiries to why the various credit easing programs were not working in the UK, EU, and the US. His response was because the credit easing programs did not resolve the issue of non-performing assets– the issue of solvency.

Your so-called “credit crunch” is just one more “fact” which is nothing but an after-affect; a derivative expression; a make-believe explanation.

We should keep in mind on what QE actually is, and to do that we have to know what the Fed usually does to increase the money supply, and hold down interest rates. It usually buys short-term treasury securities, and not directly from the US Treasury, but from the “primary dealers” (I think there 19 primary dealers in that select, and private, group).

With short term rates at or near zero and cannot be pushed lower– like the current 25 basis points (.25%) in the Fed Funds rate, the Fed has initiated 3 rounds of QE– which amount to the purchase of a range of assets– money market instruments, commercial paper; longer term US Treasury instruments; and a combination of longer term US Tsy instruments and US agency debt to drive down long term interest rates.

QE was not designed to absorb the US govt. operating deficits. Bernanke has rightly called his program more “credit easing” than quantitative easing, concentrating on driving down long term interest rates.

In response to all those who beat their breasts about the “flood of money” that the Fed would unleash, and the risk of resulting inflation, driving up interest rates, causing the dollar to depreciate and damaging the value of the holdings of US instruments by foreign central banks, asset managers, sovereign wealth funds, Bernanke rightly pointed out that the measures of the effective money supply– the money in circulation in the economy, M1 and M2 show that the supply had not grown. Members of the Fed system have kept large portions of their reserves on deposit with the Fed as bank loan demand by commercial enterprises has been weak.

Yes, indeed demand for US Tsy instruments from foreign sources has maintained its vigor, and yes indeed because of the US safe-haven status. But that status is based on fundamentals, not the suspension of fundamentals.

Bottom line, IMO, is that investment levels are not increasing in the US because 1) US has not consumed, devalued enough fixed assets– with the gross amount and the ratio being less in the 2007-2010 period than during the previous 2001-2003 recession 2) profitability has been achieved by expelling labor, thereby altering the reducing the ratio of necessary labor-time to surplus labor-time.

The attack on wages has been the source of the recovery. The still massive capital values animated by that reduced wage-portion mitigate against further investment– economy wide.

QE has done nothing to alter that fundamental element, one way or the other.

So now QE is not about funding the deficit. I though “no one” was arguing that?
Indeed as I pointed out long ago (on this thread) in a situation in which foreign asset managers were seeking a safe haven for their investments, this need trumped the possibility of dollar depreciation and inflation, so they have kept on buying the devalued US bonds. These bonds cost the government nothing – but they cost their foriegn purchasers the face value of the bond – the foreigners were literally paying for the crisis.
And you’re trying to disprove my “deductions”?
And if you think that piling up $3-4 trillion dollars of assets is an incidental detail in the whole situation, I suggest you ask Mervyn King, maybe he’d agree with you?
With a supine labour movement, and profits rising due to falling wages, why invest?

I did not say that. I am not arguing how the govt funds its deficit. I am arguing that QE was not designed to fund the deficit.

In addition, “foreigners” as such are “not paying for the crisis”– workers are, as they always do. But the appreciation in US Treasury long term instruments has been well ahead over the past 5 years of the depreciation contingent up the change in exchange rates of “foreign currencies” with the dollar. Long term US Tsy bond funds have returned over 6% per annum 2008 through 2012. That total return is a product of the overall decline in interest rates in that period, triggering an appreciation in market value of the long term instruments holding a higher coupon– this equalizes the yield-to-maturity of instruments in the market.

The annual depreciation of the dollar in relations to Europe, the ruble, the yuan has been less than 6%– and with Japan’s round of “super-easing” aimed specifically at depreciating its currency, its return from the its US holdings can increase– depending on what happens with interest rates, and how Japan manages its supply.

What we do not have with the US QE is another iteration of the Plaza Accords where Japan really was told “Tough. You eat it.”

What I can’t figure out is how, after all that, and all that is wrong in your analysis, you come up with the one important thing I happen to agree with:

What’s not the “fact” is that the cause of the crisis was a “credit crunch”– that this is a crisis brought on by a lack of liquidity; by banks being unwilling to lend.

What caused the increasing number of mortgage insolvencies? Lack of credit? At the very time, mortgage issuers, reissuers, insurers, packagers were in fact accelerating their loans to the subprime and non-conforming mortgage markets?

That’s your argument? You should go back and look at what was happening in 2006 and 2007 in the mortgage sector. All that “liquidity” vanished because the assets backing the securities which were “liquid”– meaning they could be exchanged, there was a market for them– were insolvent.

The availability of credit, or lack thereof, was a result of that underlying irreversible condition of the assets upon which “liquidity” was built. Not the first time this has happened.